Britain

Cable on capitalism

Cable versus Turner

IN THE blue corner super-smooth Adair Turner, chairman of the Financial Services Authority, championing Britain's multi-talented financial services industry. In the red corner rough-diamond Vince Cable, the Business Secretary, standing up for the little man against the evil and grasping side of capitalism. That at any rate was the impression given by newspaper reports on the morning of September 22nd, the night after learning the latest they had to say about financial reform.

Lord Turner, speaking to the City's great and good at a Mansion House dinner, blamed a philosophical failure of market regulation - even more than overpaid traders - for Britain's poor financial predicament: "…ill-designed policy is a more powerful force for harm than individual greed or error," he said. That went down pretty well.

Mr Cable, on the other hand, in a pre-released speech for the Liberal Democrat party conference, laid into the "spivs and gamblers" at banks for damaging the economy "while paying themselves outrageous bonuses underwritten by the British taxpayer."

Ouch! But the lashes got fiercer and ranged wider: "Why should good companies be destroyed by short term investors looking for a speculative killing, while their accomplices in the City make fat fees? Why do directors sometimes forget their wider duties when a cheque is waved before them?

"Capitalism," thundered Mr Cable, "takes no prisoners and kills competition where it can, as Adam Smith explained over 200 years ago."

That last barb prompted Richard Lambert, director general of the Confederation of British Industry to ripost: "Mr Cable has harsh things to say about the capitalist system: it will be interesting to hear his ideas for an alternative."

Seldom does so much fur fly in public. Is it because the stakes are so high? Mr Cable has flagged his determination to make an impact on bank structures and their lending habits. As business secretary he doesn't quite have the power to do that single-handed. The Bank of England latest quarterly bulletin suggests banks are charging even more for lending less. So he is getting angry, it seems. At least in front of his LibDem delegates.

At the Mansion House, Mr Turner's language was closer to what the City can handle. But he warned those diners that the new rules on bank capital and liquidity, known as Basel III, published on September 12th, are not as soft as they might at first appear. The sting in the tail is the change to what regulators will count, more strictly than before, as equity capital.

Who should the bankers fear most? Ultimately, if he stays in the job, Mr Turner will be applying tough rules agreed globally, with the full weight of a new European Banking Authority behind him.

Mr Cable on the other hand surely has a forgiving nature. If only the bankers can persuade him they are doing their best and that small businesses - his passion - are indeed advancing onto the longed-for level playing field.

His rant, if so it can be called, tells no more than the truth, albeit selectively, about the malpractices and inefficiencies that have crept into the global capital markets. He wants a course correction. He is not suggesting the end of capitalism, but that capitalism should serve the economy better. What on earth is wrong with that?

1. Abolish the lender of last resort. Banks will be allowed to fail because there is no safety net, not because one will not be deployed.

2. Provide no direction on interest rates. Surely a capitalist world accepts the efficiency of the interbank market?

3. Provide financial education from an early age. The ability to manage household assets and liabilities, profit and loss and cash flow is surely an essential survival skill in the concrete jungle. Spend some of the budget on financial education.

4. No more rescues. The capitalist system works in theory only because it punishes as symmetrically as it rewards. Policy makers are not there to promote growth or rising asset prices, they are there to ensure a properly functioning market. A weak company's shares should be allowed to fall, even to zero.

5. Banks that are too big to fail will never emerge or grow to that size if it is known that they have no state guarantee explicit or implicit.

These international bankers buy too much political influence, in their devious money making schemes, to the economic ruin of nations. It is in the vital interests of every nation to nationalise their banks, and put their bankers on modest postal worker salaries.

Both men are probably right, reading between the lines. I preferred Lord Turner when he questioned investment banks' social utility, that came very close to the mark. Cable is saying, I would think, that once we have been through the banking lobby's massive spin, we find that questioning them is, in fact, questioning the very fabric of capitalism..hogwash! To Mr. Cable's probable point, one thing is capitalism, which requires a level playing field guaranteed by laws and regulation, and quite another, is what has been going for a bloody long time-think S&L crisis of the 80's, Enron,and now the subprimes. That is not capitalism, that is concerted, outright fraud.

The more I hear from him, the more I see of him, the more I read what he's written, the more and more I love Vince Cable. Passion for true economics combined with caring, genuine pragmatism. Does he have a fan club I could join?